Shares, dollar gain after GDP data eases Fed fears

Herbert Lash

5 Min Read

NEW YORK (Reuters) - The dollar rose and global equity markets gained for a second day on Wednesday after a surprisingly sharp downward revision to first-quarter U.S. economic growth eased concerns the Federal Reserve might soon begin to withdraw stimulus.

Traders work on the floor at the New York Stock Exchange, June 24, 2013. REUTERS/Brendan McDermid

In addition, moves by China to calm bank fears and supportive signs from the European Central Bank on the need for continued stimulus helped extend Tuesday’s rebound after the global sell-off of stocks, commodities and bonds last week.

U.S. gross domestic product grew at only a 1.8 percent annual rate in the first quarter, the Commerce Department said in its final estimate, down from the prior estimate of a 2.4 percent pace.

The benchmark S&P 500 stock index was on track for its biggest two-day gain in three weeks, cutting the decline since its all-time closing high a month ago to 3.95 percent.

“Despite all the rhetoric and fear about tapering, this will keep the Fed firmly planted in stimulus, which is a positive for the market,” said Michael Mullaney, chief investment officer at Fiduciary Trust Co in Boston, which oversees about $9.5 billion.

“This is another example of bad news being good news.”

European stocks gained close to 2 percent to post their biggest two-day gain since April after ECB president Mario Draghi said an accommodative monetary policy was still appropriate. The bank’s policy “will stay accommodative for the foreseeable future,” he said.

The S&P 500’s advance followed a gain of nearly 1 percent on Tuesday, spurred after U.S. data on durable goods orders, sales of new homes and consumer confidence all topped expectations.

A pledge by China’s central bank, the People’s Bank of China, to act as a lender of last resort was the story of the day on Wednesday, said Fred Dickson, chief market strategist at The Davidson Cos in Lake Oswego, Oregon.

“The global fears regarding the possibility of a Chinese credit situation spilling over and becoming very serious has eased off some,” he said. The People’s Bank “is going to come in and make sure the Chinese banking system doesn’t collapse.”

Gold hit its lowest in almost three years and was on course for a record quarterly loss. Prices could slide to levels below $1,000 per ounce, investors and analysts said. Silver dropped 5 percent and platinum group metals also declined sharply.

Spot gold prices fell $53.03 to $1,223.70 an ounce. U.S. gold futures for August delivery settled down $45.30 at $1,229.80.

Bond markets in Europe and benchmark U.S. Treasuries continued to claw back ground, although investors remained worried the rebound could give way with markets likely to need more time to acclimatize to the new environment.

U.S. Treasuries gained after a recent slump took yields to near two-year highs, with the weaker-than-expected GDP pointing to continued potential for fragility in the world’s biggest economy.

The benchmark 10-year U.S. Treasury note was up 17/32 in price to yield 2.5465 percent.

Euro zone bonds rose across the board on the ECB’s pledge to keep exceptional monetary policy measures for the foreseeable future.

German Bund futures came off 8-month lows on Monday of 139.90 to settle up 49 ticks at 141.03.

If economic data is weak, “the punch bowl stays where it is. Good news, economically, the punch bowl gets moved a little bit further away,” said Wilmer Stith, co-manager of the Wilmington Broad Market Bond Fund in Baltimore.

Oil prices traded near break-even after data showed an unexpected rise in U.S. crude stocks, which combined with the GDP report, stoked concerns about the outlook for demand in the world’s top consumer.

Brent crude for August delivery rose 40 cents to settle at $101.66 a barrel. U.S. crude settled up 18 cents at $95.50 a barrel.

The euro was down 0.60 percent at $1.3005, stung by Draghi’s comments on an accommodative monetary policy and the risks to growth in the euro zone.